Financial Fundamentals — Emergency Reserve

Steve Lear |

By Kyle Berg, CFP®, BFA™

It’s another new year, and this time you are ready. You have taken the time to create a budget and give each dollar a job. You might even be using an app to track your spending. This is going to be your most financially organized year yet! When all of a sudden, something happens. Something we call the certainty of uncertainty.

This could be any number of things. A home appliance goes out, you need a medical procedure, or you lose your job. Where is the first place you go? What do you do? Are you ready?

Part of what we do as advisors is help prepare our clients for the certainty of uncertainty. And this really starts with making sure you have an appropriate amount in your emergency reserve. As part of the CFP® training, we are taught that the general rule is to have three to six months of monthly expenses easily accessible in cash-like securities. This could be a money market fund in an investment account or cold, hard cash in a checking or savings account. The thought process behind this is that, on average, it takes about three to six months to find a new job or to cover expenses for a period of time before insurance kicks in.

As you can imagine, there are always exceptions to the rule. Some people do not feel comfortable having only three, or even six, months of expenses available. And in some cases, this dovetails into a different conversation regarding risk tolerance, risk capacity, and investing (more to come on that another day). And, admittedly, over the last decade it has been difficult to justify having a significant amount of cash sitting idle, not earning much interest. But, having a solid emergency reserve is one of the first steps in the financial planning process.

Now, I am sure you are doing some math in your head, trying to figure out if you have an appropriate emergency reserve. If not, that’s OK.  As Mark Twain once said, “The secret to getting ahead is getting started.” With that said, start by making a conscious effort to protect yourself first. That may mean temporarily adjusting your savings plan to ensure you have an adequate emergency reserve. As always, we are here to answer your questions and discuss your personal financial plan.


Please remember, there can be no assurance that the content made reference to directly or indirectly in this article will be profitable, or suitable for your individual situation, or prove successful. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized advice from Affiance Financial. Please remember to contact Affiance Financial if there are any changes in your personal/financial situation or investment objectives.